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2024 (2) TMI 783 - AT - Income TaxCorrect head of income - addition of interest income on margin money kept with Bank/Financial Institution taxable under the head income from other sources - CIT(A) allowed relief to the assessee on merit that interest income is derived from or attributed to the activity of the construction of the project and therefore same is eligible to be adjusted against the capital work-in-progress - HELD THAT - In the case in hand, it is undisputed that interest has been earned by the assessee on the margin money kept with the bank under lien in respect of guarantees and the letter of the credit availed from consortium of banks. The fact that interest has been earned and the margin money was kept for purpose of guarantees and letter of credit in relation to setting up of the project has not been disputed, thus, same being linked inextricably with setting up of the plant, interest is eligible for deduction against the cost of the asset or capital work-in-progress. In view of the settled principle laid down in the case of CIT v. Bokaro Steel Ltd. 1998 (12) TMI 4 - SUPREME COURT we do not find any infirmity in the order of the Ld. CIT(A) on the issue in dispute and we accordingly uphold the same. Validity of assessment u/s 153A - Both the conditions that firstly, assessment is unabated i.e. no assessment proceedings pending as on the date of the search and secondly no incriminating material found during the course of the search, are to be cumulatively fulfilled. When we examine the above ratio of Continental Warehousing Corporation 2015 (5) TMI 656 - BOMBAY HIGH COURT confirmed by Supreme Court in Abhisar Buildwell P. Ltd. 2023 (4) TMI 1056 - SUPREME COURT , we find that qua the issue in dispute, there is no reference of any incriminating material in the order of the Assessing Officer. CIT(A) followed the decision of Sidharth Gupta 2022 (7) TMI 294 - ALLAHABAD HIGH COURT but in view of the decision of Abhisar Buildwell P. Ltd.(supra), said ratio of the decision of the Hon ble Allahabad High Court is no longer in operation and therefore, the finding of the Ld. CIT(A) on the issue in dispute is set aside .Thus, no addition qua the interest on margin money could have been made in the case of the assessee even on the legal principle. Thus, the additional ground of the assessee to this extent is allowed. Overvaluation of the capital goods - goods imported by the assessee company, which were purchased as per offshore supply contract - HELD THAT - In the entire process, the assessee was immune from escalation of project price on account of foreign currency fluctuation or delay in project execution. Therefore, the assessee was not concerned about the price at which the EPIL further purchased those goods, merely for the reason that associated company of EPIL i.e. M/s Glob Supplier, UAE had purchased those goods from OEM suppliers at lower prices, therefore, the assessee cannot be burdened with the charges of overvaluation in purchase of the capital goods. We further note that the very basis of the addition i.e. show-cause notice of the Directorate of Revenue Intelligence itself has been canceled by adjudicating authority. Since, the very basis of the making addition of overvaluation in purchase of capital goods has been cancelled; the addition made in the hands of the assessee on that very same basis cannot be sustained. Accordingly, we uphold the finding of the Ld. CIT(A) on the issue in dispute. The relevant grounds of the appeal of the Revenue are accordingly dismissed. Disallowance of interest calculated @ 12% on the funds borrowed for utilisation in alleged overvaluation of imported capital goods - CIT(A) deleted the disallowance on the ground that when the disallowance corresponding to overvaluation of the imported capital goods itself was deleted, therefore such disallowance of interest could not be sustained - HELD THAT - As we have also upheld the deletion of disallowance by the Ld. CIT(A) for the addition of overvaluation of the imported capital goods and therefore, we do not find any infirmity in the order of the Ld. CIT(A) on the issue in dispute and accordingly we uphold the same - Decided against revenue. Disallowance u/s 37(1) - assessee has recorded excess expenses in the books of accounts in context with onshore supply contract with EPIL - HELD THAT - We are of the opinion that AO has not held the excess payment of Rs. 70.77 crores paid by the assessee as non-genuine. If the assessee has actually paid the amount though it may be slightly more than the contracted price but if it is incurred wholly and exclusively for the purpose of the assessee, then merely for the reason that amount finally incurred has increased as compared to contracted price, AOhas no right to discard or ignore the excess price paid. It is for the assessee to decide whether it was required for the installation of the plant or for the purpose of the business and the Assessing Officer cannot decide what amount the assessee should pay to the EPC contractor - such disallowance made by the AO and sustained by the Ld. CIT(A) is not justified - direct the Assessing Officer to delete said addition. This ground of the appeal of the assessee is accordingly allowed. Addition of compensation received - character of compensation received from the EOL for failure in supplying Methane Gas for commissioning and dry run of the project - Receipts held by AO as business income - HELD THAT - We find that the compensation paid mainly for the reason that the dry run of the project could not carried out which is part of the activity in the capital nature and therefore the compensation received also acquired the nature of the capital and eligible for adjustment against the capital work-in-progress. AO has made addition on substantive basis in the assessment year 2016-17 and on protective basis in assessment year 2017-18, for the reason that assessee has shown commissioning of the plant in that assessment year. In our opinion the Ld. CIT(A) has correctly characterized the compensation received by the assessee as in the nature of the capital and we do not find any infirmity in the order of the Ld. CIT(A) on the issue in dispute. Accordingly, we uphold the same. The relevant ground of appeal of the Revenue is accordingly dismissed.
Issues Involved:
1. Taxation of interest earned on 'margin money' with banks. 2. Disallowance of over-valued part of cost of imported capital goods. 3. Disallowance of interest on capital borrowed for overvalued part of imported capital goods. 4. Treatment of compensation received from M/s Essar Oil Ltd. 5. Disallowance of depreciation claimed on overvalued part of work-in-progress post capitalization. 6. Validity of additions without incriminating material found during the search. Summary: 1. Taxation of Interest Earned on 'Margin Money': The Assessing Officer (AO) treated the interest income of Rs. 1,00,77,381/- earned on margin money kept with banks as taxable under 'income from other sources'. The Ld. CIT(A) allowed the assessee's appeal by citing the Supreme Court's decision in CIT v. Bokaro Steel Ltd., stating that interest earned on deposits linked to the setting up of the plant should reduce the cost of assets. The Tribunal upheld this view, noting the interest was inextricably linked to the project setup and thus deductible against capital work-in-progress. Additionally, the Tribunal accepted the assessee's legal ground that no addition could be made in non-abated assessments without incriminating material found during the search. 2. Disallowance of Over-Valued Part of Cost of Imported Capital Goods: The AO disallowed Rs. 1,29,32,54,291/- for overvaluation of imported capital goods based on a Directorate of Revenue Intelligence (DRI) show cause notice. The Ld. CIT(A) deleted the disallowance, noting the assessee had a fixed price contract with EPIL, insulating it from price fluctuations. The Tribunal upheld this decision, emphasizing the assessee's contractual obligations and the cancellation of the DRI's show cause notice. 3. Disallowance of Interest on Capital Borrowed for Overvalued Part of Imported Capital Goods: The AO disallowed interest of Rs. 87,89,98,214/- calculated at 12% on funds borrowed for the overvalued imported capital goods. The Ld. CIT(A) deleted the disallowance, and the Tribunal upheld this, given the deletion of the corresponding overvaluation addition. 4. Treatment of Compensation Received from M/s Essar Oil Ltd.: The AO treated the Rs. 240 crores compensation from Essar Oil Ltd. as business income. The Ld. CIT(A) held it as a capital receipt, reducing the capital work-in-progress. The Tribunal upheld this, noting the compensation was for delayed commissioning due to non-supply of gas, thus linked to capital costs. 5. Disallowance of Depreciation Claimed on Overvalued Part of Work-in-Progress Post Capitalization: The Tribunal noted that this issue was consequential to the overvaluation addition, which was deleted. Thus, the disallowance of depreciation was also dismissed. 6. Validity of Additions Without Incriminating Material Found During the Search: The Tribunal reiterated that no additions in non-abated assessments could be made without incriminating material found during the search, aligning with the Supreme Court's decision in PCIT vs Abhisar Buildwell P. Ltd. Conclusion: The appeals of the Revenue for assessment years 2013-14 to 2019-2020 were dismissed, while the appeals and cross-objections of the assessee were allowed.
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